Why this time isn't different

August 18, 2011

In your article "Big banks vow no repeat of '08" (Aug. 11), bank CEOs insist they have fundamental strengths so that a repeat of the 2008 financial crisis is not about to happen. Their overwhelming message in the article: This time is different.

Didn't we hear that before the 2007-2008 crisis? Wasn't that what Fannie Mae and Freddie Mac and the big banks said about buying loans being made to subprime borrowers? And the recession before that and the banking crisis rooted in the savings and loan industry that started in 1984? And so on.

I suggest these people, along with others in business and government, read "This Time Is Different: Eight Centuries of Financial Folly" by economists Carmen M. Reinhart and Kenneth S. Rogoff. They analyze 800 years of banking crises as well as defaults of nations such as Japan and Greece — a country that, according to them, has been in default for a total of 50 years since becoming an independent nation in the 19th century.

Reinhart and Rogoff define the "this-time-is-different" syndrome as the insistence that some combination of factors renders the previous laws of investing null and void.

They show that there were many red lights flashing in the U.S. and elsewhere before 2007, when the "second great contraction" — their term — began and soon transformed this country's sub-prime crisis into a global financial crisis. The authors state that anyone listening then to a long list of leading academics, investors, and U.S. policy makers (Obama was not president then) would likely conclude that the financial meltdown was a bolt from the blue. But it wasn't.

In this engaging review of eight centuries of financial crises, the authors say there are four words in the language that have caused more financial loss to people than those caused at the point of a gun. The words are: This time is different.